Investment Matters

What Matters this week

On Monday scrap metal recycler Sims Metals (-7.3%) put some numbers around the downgrade it flagged a month ago.  It wasn’t pretty, with the company expecting an underlying operating profit (EBIT) profit of A$20-50m for the year, in contrast with analysts’ mean estimates of $158m.  The cause? Demand-driven: a collapse in scrap metal prices due to weak global growth (automotive, manufacturing, Chinese demand due to trade tensions), slow sales in the UK and a lack of scrap metal supply due to weak prices.  The caveat: this revised guidance assumes that prices for scrap do not deteriorate further.

Embattled payments provider iSignthis (in a trading halt) responded to a 21-page (!) letter sent to it by the ASX on the 15th of October.  The letter probed a) Its customers and stated revenue (given the surreptitious spike in its revenue in 2018 that lead to long term incentives being awarded) b) Its involvement with two merchants litigated by ASIC for providing financial advice without an Australian Financial Services License and its due diligence process when screening potential customers c) Its relationship with Danish bank KAB, which is under a formal investigation for breaching anti-money laundering laws.  As a shareholder, you could not be blamed for being incredibly worried at this point.

Yet another IPO was pulled this week, with building equipment provider Onsite Rental failing to hit the exchange on Monday. This represents the sixth IPO to be cancelled in the past two weeks, with institutions still on a diet when it comes to new listings.

Westpac (-2.9%)butted heads with ASIC over another landmark, precedent-setting case. The case revolves around a marketing campaign by Westpac in 2014 to roll its customers superannuation into its BT Funds Management arm.  The question is, does this sort of solicitation constitute personal advice (which must be undertaken by a licensed provider and consider a customer’s personal circumstances or needs) or simply general advice.  A 2018 ruling that found that Westpac’s actions did not constitute personal advice will now be appealed by ASIC, with the outcome to define where the line falls.

Costa Group (-11.2%) waved the white flag this week, announcing a steeply discounted recapitalisation.  It raised $176m in what was a heavily subscribed offering, at a price of $2.20 – a 36.4% discount from its last traded price.  This comes as the company has downgraded its earnings guidance for FY-19 to $98m from a range $140m to $153m.  The company has been impacted by hot and dry conditions in a number of regions, which has impacted the sizing and yield from its avocado, blueberry and citrus crop.  Furthermore, the company has seen a significant contraction in mushroom and blueberry pricing.  Those that were lucky enough to get their hands on the shares on offer are already well in the black, with the stock trading at $2.85 (+30%).

Bega Cheese (-18.7%) delivered the second drought-related downgrade. The company downgraded its expected operating profit (EBITDA) to $95-105m, vs analyst expectations of $116m. Drought has led to a reduction in milk supply which has flowed through to milk pricing. The company’s efforts to diversify into value-added is yet to insulate it from input cost-related swings in profitability …

Coles (+0.2%) first quarter update revealed a slowdown in price deflation (partially attributable to the drought), with comparable growth of 0.1% in supermarkets (which were cycling sales from the “Little Shop” campaign).  This however paled in comparison to Woolworths’ supermarkets. who rode the success of Lion King Ooshies, Discovery Garden and the continued growth in Online to comparable sales growth of 6.6% in Australia.

Property Group GPT released September Quarter operational update.  For much of its portfolio it was business as usual, however, retail sales were dreadful (comparable moving annual total sales growth of 0.1%), particularly in Department Stores (moving annual total sales growth -6.3%) and in Fashion, Footwear and Accessories (moving annual total sales -5.1%).  This speaks to why some have chosen to have very little exposure to retail property at this point ...

And in what set the tone for the Australia market on Thursday, ANZ bank (-4.7%) announced that its second-half dividend will not be fully franked (for the first time since 1999).  As the company’s Australian profits have increasingly been dampened by remediation costs, the company is generating a higher percentage of its net profit from New Zealand and Asia, thus the dearth in franking credits and market tantrum that followed.